According to an article written by Rachel Feintzeig (click the preceding link to view), 1,217 business and individuals filed for Chapter 11 Bankruptcy in the month of July, 2011. This represents a substantial 24.2% increase over the previous month.
Chapter 11 Bankruptcy is a "reorganization type" bankruptcy, which is most often times filed by businesses (corporations, LLCs, etc.). Individuals who desire to reorganize under the Bankruptcy Code, but do not otherwise qualify for Chapter 13, may also file for Chapter 11 Bankruptcy protection.
There is no "qualification" process for Chapter 11 like there is for Chapter 13. In a Chapter 13, the debtor must be an individual; businesses cannot file Chapter 13. In addition, in a Chapter 13, the debtor cannot have more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, going into the plan (note: these figures are the current limits set by Congress, but are subject to change). Chapter 11 Bankruptcies have no such limits.
In many cases, a Chapter 11 Bankruptcy can help a business survive a past financial hiccup, adjust to a new market reality, or provide temporary relief from demanding creditors. However, a Chapter 11 Bankruptcy will not "save" a failed business model or bring a company back from the dead. In order to remain in a Chapter 11, the business must be profitable enough to fund its Chapter 11 Plan payments.
In general, a Chapter 11 Bankruptcy permits a business to disclose its current financial situation to their creditors and propose a reorganization plan. The creditors then vote on whether or not they are willing to accept the proposed plan, while the business continues to operate. Once the plan is approved by the businesses' creditors and the Court, the business will commence repaying its creditors, in accordance with the approved Chapter 11 Plan.
Chapter 11 also permits businesses to "lien strip" through a Chapter 11 Plan. In other words, if a business owns property with more than one loan secured by the property, and the property is worth less than the 1st position lien, then the other liens get stripped and treated as unsecured debt.
Finally, the most powerful tool in a Chapter 11 is "cram-down." In some cases Chapter 11 Bankruptcies permit a business to pay a creditor the current market value of the property, rather than what is actually owed on a loan. If the cram-down is approved by the Court, the creditor is forced to accept the fair market value of the property as a pay-off of the loan. The only downside to a cram-down is that the fair market value must be paid in its entirety during the Chapter 11 Plan.
Chapter 11 is a wonderful tool in the right situation, but even then it can be a minefield. If you have questions about whether or not a Chapter 11 Bankruptcy might be right for you or your business, please contact Clint W. Smith, P.C., and let's talk.
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